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Investment Analysis Clubs / The BMW Method


Subject:  Re: A learning curve Date:  9/11/2012  8:12 PM
Author:  PaulEngr Number:  40712 of 42233

For the most part, I buy stocks with a specific sell target in mind. I do revise that number over time so it would not matter if I started with a portfolio of stocks that I've never sold.

When I buy a stock, the goal is to beat the market...that is, exceed 10-11% annualized returns. It theoretically doesn't matter whether this occurs by dividend (preferreds or common stock) or by appreciation in value as long as it increases over time. With higher risk obviously I have to increase the margin of safety as well in order to maintain the same AVERAGE. So in reality I'm looking for more like 15-20%.

If I just wanted average returns, then I could buy an index fund or index ETF and simply sit on it for decades, watching it slowly grow over time. So since this is let's just say a minimalist, no effort strategy, I have to demand more of individual stocks.

The highest dividend stocks these days typically run around 10-11% for some MLP's at best. There is little or no appreciation in value here and only a few of them actually go up even a little in value. So these barely make the cut. Just to give you an idea of what a dividend stock looks like.

Now what I've found over time is that there is definitely more stability in a stock with SOME dividend, any dividend at all, no matter how small. So I do look for that. But it's not an absolute requirement and most dividend payouts of like 1-2% barely move the needle when I'm looking for a minimum of 10-11% in an absolutely rock solid return.

So...when I look at a stock, I'm looking for something which is going to be growing over time, generating outsized returns. Now just as with the market over the long term, I'm pricing stocks based on this economic model so it really doesn't matter if they go up or down in the future because these are built into the price of the stock today, over the very long term. But over the much shorter term (<3-10 years), we'll definitely see some that are undervalued and some that are overvalued. Now those that are undervalued (plus dividends...CAGR) will over time eventually get priced fairly or overvalued, and vice versa. So when they are overvalued, their performance is going to suffer for a period of time and when they are undervalued, the opposite will happen, over a long period of time.

A secondary problem however is that the timing for this to happen can take an exceedingly long period of time, sometimes decades. A stock's price will not make a significant correction or even go significantly up or down without a catalyst for this to happen. So paying attention to significant events is the critical catalyst. It's important to look forward in history and pay attention to when various permitting issues, major events, and so forth, are going to happen and then price accordingly because these are when the jumps will happen.

So...when I buy stocks, I already have a target in mind. I hold until that point and then sell. I recently sold a stock in about 4 days because one of those significant events happened out of the blue sky and the stock instantly jumped to my sell point. Bye, bye. I've also gone back and re-evaluated some stocks that either changed direction (in a negative way) or that are simply not performing and are unlikely to do so any time soon relative to other, better investments. So I sold them and went after other assets.

All that being said the other point is that I keep the brokerage cost at 1% or less as well which is a significant issue when you are turning over stocks and not simply holding them forever where the brokerage fees all but disappear.
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